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Indian gold market balanced between monsoon and bargain hunting


Gold investing in the massive Indian gold market looks to be returning to normal levels, according to data released by Metals Focus in its latest Indian gold report for 2023. Metals Focus said that demand for gold bars and coins in India fell by 7% in 2022 but remained above pre-pandemic levels.

In its report, Metals Focus said “we expect the economic environment to remain broadly supportive of gold demand in 2023. However, the interplay of inflation, local gold prices and how the monsoon plays out, will understandably shape demand this year.”

Why is Indian consumption so important for the gold market?

India is the second largest market for gold jewellery. It has experienced rapid change over the last few years due to changing demographics.

Weddings and festivals remain the most important drivers of Indian gold jewellery demand (bridal jewellery alone accounts for at least half the market share, according to the World Gold Council). India is also a major exporter of gold jewellery, although the vast bulk of this goes to just five countries (the US is its biggest export destination, having overtaken the UAE).

“Over the last few years the Indian gold market has grappled with numerous changes in the regulatory environment and in consumer behaviour,” the World Gold Council observed. “Looking ahead, gold jewellery demand will face further challenges. Changing demographics and the possibility that millennials will move away from gold as other luxury items demand their attention cannot be ignored.”

Weak monsoon will be a factor in gold demand

As things stand, Metals Focus analysts expect Indian demand to see contrasting trends in the two halves of the year. Jewellery consumption fell by 17% y/y in Q1.23, with price the key factor behind this weakness. This headwind has persisted, and demand could be negatively impacted by the forecast weak monsoon, driven by El-Niño conditions.

Should the monsoon remain weak, agricultural incomes may be undermined which in turn will weigh on jewellery consumption. Although we expect demand to bounce back in Q3 and Q4, this will not be enough to offset first-half losses, leaving the full year total down by 3% in 2023.

In terms of physical investment, purchases have also remained subdued in H1.23. Usually, when prices rise, Indian investors tend to buy into a rally. However, discussions with the trade revealed that this time the sudden price rise caught many investors by surprise, who became hesitant to make fresh purchases.

Bargain hunting could drive second half demand for gold

“Although the projected fall in prices later this year could trigger bargain hunting, we do not believe it will be enough to entirely offset the first half losses,” Metals Focus said in its analysis. “Therefore, we expect a 2% decline in physical investment this year.”

Research suggests that if Metals Focus’ expected price decline does occur this year we could see a notable pick-up in demand, especially as this will most likely coincide with the wedding and festive season, which starts in August/September. It is also important to note that consumers are becoming accustomed to current prices, of around Rs. 58,000-60,000/10g, and so any correction from these levels will benefit gold demand.

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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